My first Shake Shack (SHAK) burger was during a Mets game at Citi Field. It was juicy and delicious, and the shake was outstanding. Since then, I've made numerous visits to Shake Shack and I've never been disappointed.
Shareholders of the burger chain, however, must be disappointed with the stock's performance. In early 2021, Shake Shack traded above $138. By the end of 2022, the stock had fallen to $41 per share.
Now activist investors are eyeing the company. Shake Shack jumped 7.8% on Monday on word that Engaged Capital had taken a 6.6% stake in the company. Engaged Capital is reportedly seeking three seats on Shake Shack's board.
What changes are in store for Shake Shack if activist investors can exert their influence? According to reports, Engaged Capital believes it can dramatically increase Shake Shack's profitability within a few years.
How would that be possible?
Taste is subjective, but I'm not alone when I say Shake Shack is my favorite burger chain. The product is outstanding; the availability of the product is the issue.
There are only 262 Shake Shack locations in the entire U.S. Compare that to the 13,515 McDonald's (MCD) locations. It's time for Shake Shack to expand aggressively.
Consider Jersey Mike's, the sandwich chain that is taking the U.S. by storm. Jersey Mike's has just under 2500 locations, nearly ten times the number of Shake Shack stores.
Like Shake Shack, Jersey Mike's created a superior version of a widely available product. The rise of Jersey Mike's coincided with the decline of the Subway restaurant chain. Subway saw a net loss of 999 locations in 2019, 1609 in 2020, 1043 in 2021, and 571 in 2022.
Shake Shack could shake up its niche in a similar way. Although this stock is higher by 69% year to date, Shake Shack's shares have lost nearly half their value since early 2021. The stock is breaking out, is above its 50-day (blue) and 200-day (red) moving averages, and is rising on strong volume.
Chart by TradeStation
If Shake Shack can dramatically increase the size of its footprint, there will be opportunities to improve profit margins due to scale. The trick is to maintain high quality standards while ramping up the business.
I like this stock regardless of the current drama. If Engaged Capital is able to influence the direction of the company, that's positive for shareholders. If not, at least Shake Shack's untapped potential is now in the spotlight. I'm entering a small position now, and looking to add on a pullback -- a likely scenario after the stock's recent rally.
